The Recurly Payment Gateway

We are proud to announce that we have built the first payment gateway designed to support recurring billing as the primary use-case. This means that we access rich error messages from the payment processor to optimize many different common credit card decline types. As we have communicated recently, credit card declines lead to painful customer churn, which is one of the most important and sensitive metrics for any subscription business.

During beta testing, our trials demonstrated a range of 10-27% incremental lift in recovered invoices for a variety of different kinds of businesses (Both B2B and B2C).

The new Recurly Payment Gateway is now bundled with the Recurly service. In addition, we are adding critical customer retention reports so that our customers can track the long term trends of their customers by cohort month, and by subscription plan.

New Recurly Pricing

As of today’s announcement, Recurly’s pricing structure has also changed.

We now charge a simple 1.25% and $0.10 per transaction per month, with a $69 monthly minimum (as there has been for some time).

Grandfathered Pricing

Existing Recurly ‘live production’ customers will remain on their original pricing unless they choose to take advantage of the Recurly Payment Gateway, or any of our premium features – such as Retention Reports, Salesforce Integration, PayPal Payments or Multi-Currency support. We will continue to support other payment gateways to offer the broadest choice to our customers, but the cost of other payment gateways are not inclusive with our new pricing.

No Merchant Account, No Problem

All you need to take advantage of the Recurly service is your own merchant bank account. If you don’t have one already, we can help you apply and get set up with an account offering extremely competitive rates.

We’re excited about our role in helping companies to optimize their subscriber renewal rates. Our ambition is to make the Recurly service a distinct competitive advantage for our customers.

If you have any questions about the Recurly service, or the Recurly Payment Gateway, please contact sales@recurly.com.

We can help.

Cheers,
The Recurly Team.

If you had to pause and ponder the answer, or if you felt that it was everybody’s responsibility…then you’re not alone.

When I was with eBay, it was far easier for marketing teams to focus on acquiring new customers than to identify an effective means to address customer churn. Customer churn is a ‘wet bar of soap’ problem, and therefore always seems to be ‘somebody else’s responsibility’, because it is a difficult problem to attack.

Consider these factoids:

Most Executives Have No Idea What Drives Their Churn

Identifying the drivers of customer churn can be extremely difficult. Additionally, customer acquisition is infinitely more fun for marketers than retention marketing. [It is much more interesting and profitable for Ad Agencies to focus on driving brand awareness, positioning and expanding appeal than driving retention metrics.]

In our business of providing subscription billing, we frequently discuss the topic of customer retention and churn with our customers. Through this, we’ve learned that executives generally have a clear sense for their own customer retention and churn metrics, but they have very little idea what is driving it. Most will cite Net Promoter Scores (NPS), or customer satisfaction rates as the broad and diffuse driver of customer churn, but they have difficulty pinning down any single reason why their customers leave them.

Subscription Businesses – Plug That Leaky Bucket!

For subscription businesses, customer retention is driven by renewal rates. Improving renewal rates extends the ‘T’ in Lifetime Value (LTV), and this is an extremely sensitive variable in the overall calculation. The enemy of the renewal rate is your churn rate.

Q: What drives customer churn in subscription-based businesses?

A: [Assuming your product/service delivers good value] If you are a subscription-based business, the most immediately addressable, passive culprit is: Credit card errors and declines.

What Can You Do?

Examine Your Credit Card Decline Logs!

Many commonly experienced credit card errors can be successfully remediated. Results will vary depending on your payment gateway/payment processor combination, but by beginning with your credit card error logs, and working backwards towards the solve, you will find that you can dramatically reduce your customer churn with proper error and decline remediation. However, if your customer credit cards are stored within a payment gateway, you will be limited in your ability to remediate many common errors.

If you have questions about Recurly’s standard error handling practices, and how we might help your business reduce customer churn, please contact us.

Email sales ‘at’ recurly.com or call 415-800-2042.

Asking for a credit card number is a significant hurdle for most people. High fall off rates are to be expected. But once someone gives you a card number and starts a trial, they are more likely to convert to a paid subscriber at the end of the trial. So, if you are optimizing for your conversion numbers from trial to paid, then collect the credit card at the beginning of the trial.

If you offer a trial period and require your users to upgrade before the end of the trial, you will get more people in the door and trying your service. However, it’s very difficult to get someone to come back before the end of the trial to enter their card number. At least the number of total users will be much higher; use this as an opportunity to collect more feedback from your free users, especially the ones that declined to upgrade.

If you are able to offer your users an indefinite, free version, then you can wait to collect the credit card number when the user is ready to upgrade and convert to a paid subscriber. You benefit from getting the most people in the door and will have the most opportunities to ask the user to consider upgrading.

At the end of the day, you need to factor in the costs associated with the free trial, the viral-ity of your product, and the likeliness of a conversion when deciding when to collect their credit card number. You’ll get the highest retention rate when you can reach the customer the most (while providing value, not annoyance).

In the next several weeks, the TechTalk video should become available. Until then, let me share a few of the key points with you.

The Basics: How a Payment is Routed

The credit card network is a crazy network in and of itself — lots of banks, credit card networks, and payment gateways & they all need to talk to eachother.  That’s where your payment gateway comes in; your site communicates with the gateway and the gateway routes the credit card transaction to the right credit card company (who in turn routes it to the customer’s bank).  In the end, there’s about 5-6 hops before an authorization is made — see our article How many companies does it take to process a credit card? for more information.

In addition to a payment gateway, you will need a merchant account.  The merchant account is best described as a special checking account for your business.  This is where all the money you collect from your subscribers will be deposited.  The payment gateway, through the credit card interchange network, coordinates withdrawing money from the customers bank account and deposits these funds in your merchant account.

Getting a Merchant Account

I think of merchant accounts as special checking accounts because they really are special.  Special as in time consuming to open and full of headaches.  When you collect money via credit cards, the transaction doesn’t end when the money is deposited in your account.  You can be liable for that money for months after the transaction is over because the credit cards want to protect the consumer. For example, if you sell $1 million of goods but then go out of business before you deliver those goods those consumers will ask the credit cards for their money back and all of a sudden you better have $1 million still in your merchant account.

If you’re working a side project, or your business is going to scale up slowly, then I don’t want you to waste much time on opening up a merchant account.  Instead, you should look at using a service like PayPal Website Payments Pro — it combines a merchant account and payment gateway in one, and is easier to apply for.  But if you’re incorporated and this is your revenue stream, you should open a merchant account with a proper bank.  And, you should budget about a month for the full process of opening a merchant account and getting the credit card agreements in place.

For internet start-ups in the San Francisco area, we strongly recommend Silicon Valley Bank for merchant accounts.  They understand start-ups like nobody else.  Recurly spent a month trying to open a merchant account with Bank of America.  Ultimately, B of A denied us because they don’t understand e-commerce.  This is pretty common among traditional brick-and-mortar banks.

Payment Gateways

Not every bank (merchant account) will work with every payment gateway.  If there’s a gateway you really want to use, make sure it works with your bank first.  Along those same lines, not all integration is equal.  Some banks have first class integration with some payment gateways.  When a bank has a strong integration, you’ll get access to your money faster, possibly better transaction rates, and better error messages.

One word of advice, be careful signing up for your payment gateway through your bank’s reseller program.  When your bank resells a payment gateway account, you cannot keep your gateway and switch merchant accounts!  This is so incredibly important.  If you store your credit cards with your payment gateway and your bank decides to close your account for any number of reasons, you no longer have access to your credit card information.  It’s totally not worth the $200 savings off the payment gateway setup fee.  Seriously, this happened to me and nearly killed the company’s revenue.

If you’re looking for a gateway that understand technology well, take a look at Braintree Payment Solutions.

Maximizing Acceptance Rates

Address Verification

Address Verification (AVS) is old school.  Perhaps it works differently across different payment gateways but my experience with Authorize.Net’s AVS suggests that this is old school 1960′s string matching technology.  Zip code validation only works reliably inside the US — it almost always fails on alpha characters. So, if you accept international payments, make sure your AVS will succeed on street address matches OR zip code matches, if the customer’s bank supports AVS.  That setting will help you minimize fraud and maximize acceptance rates.

If you’re only conducting business in the US, you can turn up AVS more if you like.  This advice is critical if you want to accept international transactions and minimize headaches.

Expiration Dates

Here’s an industry secret – expiration dates usually don’t matter as long as they’re in the future.  Several years ago, the credit card companies and utility companies came to an understanding about expiration dates — it’s much easier to setup auto-pay for recurring payments if the expiration date doesn’t matter.  The banks understand that if your card is stolen, they can just change the number — there’s no point in having it stop working because of an expiration date.

If you store the expiration date with the credit card information in a payment gateway (e.g. Authorize’s CIM), that card will stop working after the expiration date.  You cannot move it forward unless you collect the user’s credit card number again.  But if your billing system is smart enough, perhaps it can try moving the current expiration date forward before asking the user to update their payment details when the card expires.

1 Cent Authorizations

If your payment gateway allows you to test a credit card with a 1 cent authorization, don’t use it.  Seriously.  It will fail 2-5% of the time.  Some banks can’t believe anyone would want a 1 cent payment so they will deny it for being too small.  Instead, either use a $1 authorization or authorize the transaction for the amount you want to collect in the future (if you know exactly how much that is).  And finally, void the authorization afterwards.  If you don’t, the credit card companies may hit you with a fine — this is becoming more common since an authorization effectively puts a hold on funds in the customer’s account and they want you to release it if you don’t intend to collect.

Keep Your Pricing Simple

If you have a great product, your customers will want to pay you.  But if your pricing is too complicated, three things happen:

• Your sales guy can’t explain pricing,
• Your programmers (you) will spend too much time figuring out how to bill your users, and
• Your customers will complain that they’re paying too much.

Simplify your pricing, perhaps replace overage fees with auto-upgrading tiers, and magic happens:

• Your sales guys can explain it in a minute,
• Your programmers (you) will spend less time on billing, and
• Your customers will be happy to pay.

Minimize Your Time Handling Billing Support

Billing support will overwhelm you if you’re not ready.  Make sure your users can self service their accounts the moment you start charging.  If you offer more than one billing cycle or pricing plan, allow your users to change their plan with minimal hassle — otherwise they’re going to write to your support and you’ll have to do it for them, and often.

Make it easy for your subscribers to cancel.  They should not have to contact you to stop paying you — in the end they’ll just be more likely to call their credit card company and dispute the charge (that’s a chargeback).  And if you collect enough chargebacks, say goodbye to your merchant account.

Finally, if you build your own subscription billing system, you’re going to spend disproportionate amounts of your time handling past-due accounts.  You’ll get up and running quickly with your payment gateway’s recurring billing API, but you’ll spend 10x more time trying to figure out how to handle an account when a payment fails.  That’s precisely why we created Recurly.

TechTalk Slides

When you enter your credit card on a website, it sends the credit card information over an encrypted channel to a payment gateway. The payment gateway’s primary responsibility is to authorize payments and communicate with the merchant’s bank. Banks communicate with the payment gateway using a proprietary network and/or protocol.  Since your website is not processing billions of transactions a month, your bank does not want to integrate with you.  So, the payment gateway effectively becomes the middle man.

However, if the merchant bank is small (compared to a bank like CitiBank, Chase, or Bank of America), the merchant bank likely uses another company to communicate with the payment gateway.  This middle man is known as a merchant service provider.  Unless you run into some very tricky problems authorizing transactions, you are not likely to know this company exists.  In most cases, the merchant service provider does their job and stays completely in the background.

Now that the merchant bank has the transaction information, it routes the details to the customer’s credit card company — Visa, MasterCard, Discover, American Express, etc.  Since Discover and American Express are usually issued directly to a customer (and not through an issuing bank), these card companies return an authorization or declined message.  Otherwise, the credit card company must now connect to the customer’s credit card issuing bank.  Finally, the customer’s bank can authorize or decline the transaction and the message routes all the way back to the originating e-commerce site.  On average, the whole authorization process can take 2-3 seconds due to all the parties involved in the transaction.

To summaries the authorization flow, the credit card information goes from the user’s browser to the e-commerce website to the payment gateway (optionally) to the merchant service provider to the merchant bank to the credit card company to the user’s bank for approval.

At the end of the day, the merchant’s bank must settle the transactions (assuming the funds were captured, or approved for transfer).  The merchant bank then works with the credit card company and users’ banks to transfer the funds.